The Mortgage Bankers Association just released its Commercial Real Estate/Multifamily Finance Quarterly Data Book for the first quarter. And despite a fairly high snooze factor rivaling just about any Tom Cook appraisal, the report has some interesting information:
–Commercial real estate fundamentals are beginning to show signs of stabilization, though property and mortgage performance remains weak.
–As economic growth continues, the impact on commercial real estate markets should broaden and reach rents, vacancies and delinquencies.
–Delinquency rates continued to climb for all investor groups with CMBS portfolios showing the highest levels of problem loans.
–Even with such growth, many of the drivers for transaction activity – both sales and financings – remain muted.
–Despite what appears to be significant competition to lend, borrowing remained light.
As a recovering lender I can get excited about the first point. I can live with weakness in the market so long as there is some level of stability. I can underwrite property weakness. I can price the risk and structure the deal accordingly, and then make money on the loan. What I cannot price and structure is instability, at least not on terms that would be reasonably acceptable to the market, so the thought that fundamentals are stabilizing – even with some weakness – is good news.
An additional benefit of stability is that it will attract large, institutional investors to the commercial real estate markets. These players are critical to the reemerging conduit market that depends on the inflow of capital from institutional investors.
As to the higher delinquency rates, I again am not so concerned about the impact on future lending because I can identify the basic reasons for the higher rates: mass hysteria and the abandonment of prudent underwriting. The highest delinquency rates are in the CMBS portfolios that came out of the conduit lenders and those loans that are going bad mostly come from originations done in 2006 through 2008. As a lender I can see why those loans went bad and avoid the pitfalls. If I can convince CMBS investors that I have learned my lesson and am originating loans the right way, I can make conduit loans again and sell CMBS in the market again. This is good news for all banks who need a resurgent CMBS market to reduce commercial real estate concentrations and make way for new lending.
The last two points made in the MBS report show that things are still slow in terms of transaction volume and lending activity, a fact that we in South Louisiana can readily see ourselves. Things in our market are still slow and those of us who live on commission are struggling to hang on. The good news is that things appear to be stabilizing which should lead to recovery and increased activity as the economy continues to gain strength, albeit slowly. For the full MBA report click here.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
